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The text of Section 926(2)(A) of the Dodd-Frank Act provides that Commission requirements for Rule 506 offerings must disqualify any covered person that

121 _{Disqualification would be terminated immediately, however, if the judgment or order were reversed or vacated.} 122 _{For a more general discussion of interpretations of the meaning of “subject to” an order, see note 156 and} accompanying text.

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A) is subject to a final order of a State securities commission (or an agency or officer of a State performing like functions), a State authority that supervises or examines banks, savings associations, or credit unions, a State insurance commission (or an agency or officer of a State performing like functions), an appropriate Federal banking agency, or the National Credit Union Administration, that—

(i) bars the person from—

(I) association with an entity regulated by such commission, authority, agency, or officer; (II) engaging in the business of securities, insurance, or banking; or

(III) engaging in savings association or credit union activities; or

(ii) constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct within the 10-year period ending on the date of filing of the offer or sale.

As we noted in the proposing release, Section 926(2)(A) is essentially identical to Section 15(b)(4)(H) of the Exchange Act and Section 203(e)(9) of the Advisers Act. The only difference is that Section 926(2)(A)(ii) contains a ten-year look-back period for final orders based on violations of laws and regulations that prohibit fraudulent, manipulative and deceptive conduct, while the Exchange Act and Advisers Act provisions have no express time limit for such orders.

We proposed to reflect Section 926(2)(A) as new Rule 506(c)(1)(iii), with three changes from the text of Section 926(2)(A), which were intended to eliminate potential ambiguities and allow for easier application of the rule. First, the proposal specified that an order must bar the covered person “at the time of [the] sale,” to clarify that a bar would be disqualifying only for as long as it has continuing effect. Second, the provision measured the look-back period from the

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date of the relevant sale, not from “the date of filing of the offer or sale,” as provided in Section 926 of the Dodd-Frank Act, so it would align with the other look-back periods in the rule. Finally, the provision required that orders must have been “entered” within the look-back period, to clarify that the date of the order, and not the date of the underlying conduct, was relevant for that determination.

Under the proposal, an offering would be disqualified if any covered person is subject to a final order of a state securities commission (or an agency or officer of a state performing like functions); a state authority that supervises or examines banks, savings associations, or credit unions; a state insurance commission (or an agency or officer of a state performing like

functions); an appropriate federal banking agency; or the National Credit Union Administration that at the time of such sale, bars the person from association with an entity regulated by such commission, authority, agency, or officer; engaging in the business of securities, insurance or banking; or engaging in savings association or credit union activities; or constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct entered within ten years before such sale.123

We solicited comment on a number of aspects of the proposed provision, including the treatment of bars, the definition of the terms “final order” and “fraudulent, manipulative and deceptive conduct,” and the potential to cover orders of other regulators in addition to those mandated by Section 926 of the Dodd-Frank Act, particularly the Commission and the

Commodity Futures Trading Commission (“CFTC”). As discussed in more detail below, we are adopting the provision substantially as proposed, but adding the CFTC to the list of regulators

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whose regulatory bars and other final orders will trigger disqualification.

CFTC Orders. The proposing release solicited comment on whether orders of the CFTC or any other regulator not referred to in Section 926 should result in disqualification from Rule 506 offerings. Four commenters favored adding CFTC orders as a disqualification

trigger.124 One noted that “conduct that would typically give rise to a CFTC sanction is similar to the type of conduct that would result in disqualification if it were the subject of action by other regulators in the securities, banking and insurance fields.”125 _{Others cited benefits such as}

improved investor protection, harmonization of the treatment of regulatory entities, and

improved internal consistency of the bad actor rules.126 _{Another asserted that it was “obvious”}

that at least some CFTC orders should be covered by the disqualification rules.127 Two of these commenters also recommended that the rules cover orders of additional regulators.128 _Seven

comment letters opposed adding CFTC orders, generally arguing that such an addition would not be “substantially similar” to Rule 262 and questioning the Commission’s legal authority to add such a new disqualifying event.129

We are persuaded that appropriate CFTC orders should be included as a disqualification trigger in new Rule 506(d). As we noted in the proposing release, the conduct that would typically give rise to CFTC sanctions is similar to the type of conduct that would result in

124 _{See comment letters from Better Markets, Cleary Gottlieb, NYCBA, NASAA.} 125 _{See comment letter from Better Markets.}

126 _{See comment letters from Cleary Gottlieb, NASAA.} 127 _{See comment letter from NYCBA.}

128 _{See comment letters from Better Markets (advocating addition of orders by other agencies with jurisdiction over} misconduct in the financial services arena, including the Consumer Financial Protection Bureau and the Federal Trade Commission); NASAA (advocating addition of orders under state franchise, investment and finance laws). 129 _{See comment letters from ABA Fed. Reg. Comm.; Five Firms; Katten Muchin; Lehman & Eilen; Rutledge;} Schuyler Roche; SIFMA.

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disqualification if it were the subject of sanctions by another financial services industry

regulator. For that reason, CFTC orders trigger consequences under other Commission rules (for example, both registered broker-dealers and investment advisers may be subject to Commission disciplinary action based on violations of the Commodity Exchange Act).130 _{In addition, the}

CFTC (rather than the Commission) has authority over the investment managers of pooled investment funds that invest in commodities and certain derivatives products; unless Rule 506(d) covers CFTC orders, regulatory sanctions against those investment managers are not likely to trigger disqualification. For these reasons, we believe that including orders of the CFTC will make the bad actor rules more internally consistent, treating relevant sanctions similarly for disqualification purposes, and should enable the disqualification rules to more effectively screen out felons and bad actors.

We have decided to include CFTC orders in the bad actor disqualification scheme by adding the CFTC to the list of regulators in Rule 506(d)(1)(iii). As a result, disqualification will be triggered only by CFTC orders that constitute “bars” or “final orders” relating to prohibitions on “fraudulent, manipulative or deceptive conduct” on the basis discussed below.

Bars. Our requests for comment focused on whether there was a need for the

Commission to explicitly state that all orders that have the practical effect of a bar (prohibiting a person from engaging in a particular activity) should be treated as such, even if the relevant order did not call it a “bar.” We also requested comment on whether it would be appropriate to

provide a cut-off date (for example, ten years) for permanent bars.

Several commenters urged us to provide additional guidance about what constitutes a

130 _{See, e.g., Section 15(b)(4)(D) of the Exchange Act (15 U.S.C. 80(b)(4)(C)) and Section 203(e)(5) of the} Advisers Act (15 U.S.C. 80-b3(e)(5)).

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bar.131 _{We believe the statutory language is clear: bars are orders issued by one of the specified}

regulators that have the effect of barring a person from association with certain regulated entities; from engaging in the business of securities, insurance or banking; or from engaging in savings association or credit union activities. Any such order that has one of those effects is a bar, regardless of whether it uses the term “bar.” Orders that do not have any of those effects are not bars, although they may be disqualifying “final orders,” as discussed below.

Consistent with the proposal, the final rule provides that an order must bar the person “at the time of [the] sale” from one or more of the specified activities, to make clear that a bar is disqualifying only for as long as it has continuing effect.132 _{Thus, for example, a person who}

was barred indefinitely, with the right to apply to reassociate after three years, would be

disqualified until such time as he or she is permitted to reassociate, assuming that the bar had no continuing effect after reassociation. Several commenters argued that we should impose a cut- off date for permanent bars.133 _{This would effectively treat permanent bars the same as other}

final orders, which are disqualifying only if issued during the look-back period. We are not, however, departing from the current standard under Rule 262 either by imposing a look-back period (making all regulatory bars issued within a specified period before a sale disqualifying, even if no longer in effect) or by imposing a cut-off date (which would make bars no longer disqualifying after the requisite time period has passed, even if the bar is permanent or otherwise

131 _{See comment letters from Alfaro; ABA Fed. Reg. Comm.; Rutledge; SIFMA; Whitaker Chalk.}

132 _{This accords with the Commission’s interpretive position on Rule 262. See Release No. 33-6289 (Feb. 13,} 1981) [46 FR 13505, 13506 (Feb. 23, 1981)] (Commission consistently has taken the position that a person is “subject to” an order under Section 15(b), 15B(a) or (c) of the Exchange Act or Section 203(e) or (f) of the Advisers Act only so long as some act is being performed (or not performed) pursuant to the order). Seenote 156 and accompanying text.

133 _{See comment letters from ABA Fed. Reg. Comm.; Katten Muchin; Lehman & Eilen; Rutledge; Schuyler, Roche} & Crisham, P.C. (July 14, 2011) (“Schuyler Roche”); SIFMA.

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still in effect). Under Rule 262, bars are disqualifying for as long as they are in effect but no longer, matching the period of disqualification to the duration of the regulatory sanction. We are adopting the same approach for Rule 506. Persons who are subject to an indefinite bar who do not wish to reassociate but do wish to participate in Rule 506 offerings could consider applying for a waiver.

We recognize that, in the proposal and in the final rule, the treatment of court injunctions and restraining orders, on one hand, and regulatory bars and orders, on the other hand, is

different in some respects. Court injunctions and restraining orders are subject to a five-year look-back period, which functions as a cut-off (i.e., injunctions and restraining orders issued more than five years before the relevant sale are no longer disqualifying, even if they are still in effect or permanent). The treatment of court injunctions and restraining orders is consistent with Rule 262, and therefore responds to the requirement to develop a “substantially similar” rule, while the treatment of regulatory bars and orders is specifically mandated by Section 926 of the Dodd-Frank Act. Commenters did not generally support harmonizing our approach to court injunctions and restraining orders with the mandated treatment of regulatory bars and orders, and we do not believe that the shift from Regulation A to Rule 506 offerings justifies extending the time period for disqualification associated with court injunctions and restraining orders.

Final Orders. Section 926 of the Dodd-Frank Act does not specify what should be deemed to constitute a “final order” that triggers disqualification. The proposal included an amendment to Rule 501 to provide a definition of “final order,” based on the definition that the Financial Industry Regulatory Authority (“FINRA”) uses in forms that implement language in

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Section 15(b)(4)(H) of the Exchange Act, which is identical134 _{to the language used in}

Section 926.135 _{Under the proposal, “final order” would mean “a written directive or declaratory}

statement issued pursuant to applicable statutory authority and procedures by a federal or state agency described in § 230.506(c)(1)(iii), which constitutes a final disposition or action by that federal or state agency.”

The proposing release requested comment on other potential approaches to the term “final order,” such as whether the rule should consider orders final only if they are non-

appealable, and whether the rule should cover only orders issued in a process that provides for certain due process rights, such as notice, a right to be heard, and a requirement for a record with written findings of fact and conclusions of law. We also queried whether disqualifying matters that arose in the context of a settlement with a regulatory authority should be treated the same as non-settled matters. The proposing release also discussed whether the Commission should defer to the regulator issuing the order to determine whether the issued order was a “final order” for purposes of disqualification in Rule 506.

Several commenters agreed that a definition of “final order” would be helpful in promoting uniform and predictable treatment of regulatory actions.136 _{Four commenters were}

generally supportive of the proposed definition.137

134 _{Note, however, that Section 15(b)(4)(H) does not contain a look-back period, unlike the 10-year look-back} period specified in Section 926(2)(A)(ii).

135 _{The definition of “final order” used by FINRA applies to Forms U4, U5 and U6, which are used for reporting the} disciplinary history of broker-dealers and associated persons under Exchange Act Section 15(b)(4)(H). Form U4 is the Uniform Application for Securities Industry Registration or Transfer, used by broker-dealers to register associated persons. Form U5 is the Uniform Termination Notice for Securities Industry Registration, used by broker-dealers to report the termination of an associated person relationship. Form U6 is the Uniform Disciplinary Action Reporting Form, used by SROs and state and federal regulators to report disciplinary actions against broker- dealers and associated persons.

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Two commenters suggested adding minimum procedural standards to the definition of “final order.”138 _{One advocated building “basic due process elements” into the definition by}

adding the concept of notice and an opportunity for a hearing.139 _{This commenter suggested}

that, in order to ensure that settled matters would be treated the same as litigated matters, the definition should require “an opportunity for hearing” rather than some specified actual proceeding.140 _{The other commenter recommended that, for an order to constitute a “final}

order,” a regulator “must have made a finding of fact and set forth conclusions of law on a record.”141

Taking into account the potential impact of disqualification on issuers and other market participants, we are persuaded that the definition of “final order” should be limited to orders issued under statutory authority—including statutes, rules and regulations—that provides for notice and an opportunity for hearing.142 _{As a result, under our final definition, ex parte orders}

issued under statutory authority that does not provide for notice and an opportunity for hearing will not trigger disqualification. We are not, however, imposing procedural requirements beyond a basic requirement that notice and opportunity for hearing be provided for in the statutes, rules and regulations under which an order is issued. The proceedings covered in Rule 506(d)(1)(iii) take many different forms, and it would not be appropriate for our rules to impose procedural 137 _{Letters from C. Barnard; Rutledge; Better Markets; Munck Carter, LLP (July 14, 2011) (“Munck Carter”).} 138 _{Letters from NYCBA; SIFMA.}

139 _{Letter from NYCBA.} 140 _Id.

141 _{Letter from SIFMA.} 142 _{See Rule 501.}

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requirements that may not be met by the proceedings of every state or federal regulator whose orders are required to trigger disqualification under Section 926 of the Dodd-Frank Act. We are also not requiring that a hearing actually have occurred. There may be no hearing, for example, in the context of a settled matter; however a settlement is considered for this purpose to have been made after an opportunity for hearing. The basic requirement we have included should be sufficient to address the fundamental fairness concern.

We believe that focusing on the nature of the relevant legal authority for an order rather than the particular facts and circumstances surrounding the order will provide more certainty to issuers seeking to determine whether a covered person subject to an order is in fact subject to a “final order” that would be disqualifying. An issuer would only need to determine whether the statutory authority provided for these procedural safeguards, not whether in fact notice was given and an opportunity for hearing was provided. This approach is consistent with comment we received stressing the importance of making the disqualification provisions clear and simple to administer, based on “bright line” provisions or an “objective test” wherever possible.143 _The

focus on legal authority rather than the facts of each case will also likely reduce the incidence of covered persons, in an effort to participate in an offering, claiming procedural irregularities where such irregularities did not occur. A market participant that is subject to an order that was issued without in fact receiving notice and an opportunity for hearing will be able to challenge the order itself, and may also seek a waiver of disqualification from the Commission.

143 _{Letter from NYCBA}

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We do not believe that limiting final orders in this way will compromise investor

protection because, in most instances, ex parte orders are of short duration and will either expire

or be replaced by a subsequent order that would meet our procedural requirements.

Commenters were divided on the question of whether orders should be deemed final if they are still subject to appeal. Three commenters objected to adding a requirement that final orders be non-appealable, generally on the basis that the resulting delay could compromise investor protection.144 _{Three other commenters argued that the definition of “final order” should}

be limited to non-appealable orders.145 _{We remain concerned that delay incident to the appeals}

process could undermine the intended benefits of the rule, and are therefore adopting the definition of “final order” without a requirement that the order be non-appealable.146

As adopted, the definition of “final order” contained in new Rule 501(g) provides that “final order” shall mean a written directive or declaratory statement issued by a federal or state agency described in § 230.506(d)(1)(iii) under applicable statutory authority that provides for notice and an opportunity for hearing, which constitutes a final disposition or action by that federal or state agency.

Fraudulent, Manipulative or Deceptive Conduct. Section 926(2)(A)(ii) of the Dodd- Frank Act provides that disqualification must result from final orders of the relevant regulators that are “based on a violation of any law or regulation that prohibits fraudulent, manipulative, or